The 1990s Economy

Under the headline "The Story of the 1990s Economy," a commentary from the think tank Economic Policies for the 21st Century attributes the growth in the late 1990s to faster computers:

what explains the productivity surge and the sharp rise in economic growth during the late 1990s? In a 2007 paper, a team of economists lead by Harvard's Dale Jorgenson found the economic expansion was driven by efficiency increases in the production of IT, including computers, software and telecommunications components. Improvements in IT production "resulted in higher rates of decline in IT prices, stimulating decisions by firms, households, and governments to invest in IT equipment and software."

But why was there a sudden improvement in the production of IT equipment in the mid-1990s? Jorgenson located the change in the semiconductor industry, a key source of components for computer chips. He noted that "[a] sharp acceleration in the rate of decline of semiconductor prices took place in 1994 and 1995 … as the semiconductor industry shifted from a three-year product cycle to a greatly accelerated two-year cycle." Jorgenson argued elsewhere that the shortened product cycle was the result of competitive pressures in the semiconductor industry. In other words, a market-driven positive feedback loop was a central factor behind the 1990s expansion: competitive pressure drove production improvements in a key IT industry, leading to lower IT equipment prices and increased investment by businesses and consumers.

Other factors were certainly at play: research has also identified the role of organizational change and business process innovation in enabling firms to extract value from the new technologies they purchase. But there can be no doubt the roaring economy of the 1990s was due in large part to the impact of information technology on economic growth and productivity.

Look, I have nothing against fast computers, but it seems strange to me to explain the growth of the late 1990s by focusing on computers while ignoring three other significant factors: a cut in the capital gains tax, welfare reform, and the Republican Congress. The cut in the capital gains tax made investment more rewarding. Welfare reform added new people to the workforce. And the Republican Congress, combined with a Democratic president, created a check on federal spending and on the growth of government.